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Qatari banks face higher costs as diplomatic crisis looks to drag on

Banks in Qatar have shrugged off liquidity concerns that arose from an ongoing dispute between the country and a group of Arab states, but they face higher funding and risk costs as the feud shows no sign of ending, analysts told S&P Global Market Intelligence.

The Qatari banking sector saw significant outflows of foreign deposits after Saudi Arabia, the United Arab Emirates, Bahrain and Egypt cut off diplomatic and trade relations with Qatar on June 5, 2017, over the country's ties to Iran and allegations that Qatar had sponsored terrorism. A substantial amount of these deposits are understood to have come from the four Arab states.

"[From June to year-end 2017], the Qatari banking system lost $22 billion [in outflows]," according to Mohamed Damak, global head of Islamic finance at S&P Global Ratings. The crisis initially led to concerns over the liquidity and profitability of Qatari banks, but their fourth-quarter 2017 results showed no signs of deposit pressure as cash inflows from the government and the Qatar Central Bank more than offset the withdrawals.

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"The logic was that there would be deposit outflows [from] these banks, especially the money that has been parked by the banks or other corporates of these four countries, and [those outflows] would lead to Qatari banks fetching deposits at higher costs. That would have increased their interest expense and impacted their net income," said Securities and Investment Co. analyst Chiro Ghosh. "But [in between] the Qatari government came in and they pumped money into the Qatari banks."

Public-sector deposits at the end of June 2017 rose about 21% from the previous month to reach 242.22 billion Qatari riyals, and remained elevated as the crisis dragged on, ending 2017 at 315.40 billion riyals, according to data from the central bank. Meanwhile, foreign outflows appear to have eased by the fourth quarter of 2017, with foreign deposits rising slightly on a month-on-month basis in December, and for the first time since the embargo began, to 137.13 billion riyals.

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The Qatari government and government-related entities have injected a total of about $43 billion into the banking sector, more than offsetting the flight of foreign deposits from the banks, Damak told S&P Global Market Intelligence, adding: "We think that the outflows will continue as the deposits mature, but ... the issue will be dealt with in a relatively organized way."

"We don't expect any major instability or liquidity issue there, as long as we don't see an escalation in political risk or as long as we see no other country joining the club of countries that placed Qatar into sanctions."

With deposit trends now having stabilized more than eight months since the feud erupted, attention turns to other metrics at the Qatari banking sector, and lenders' bottom lines are not yet out of the woods.

IFRS 9 impact

"Profitability is expected to deteriorate slightly because of two things: higher cost of funding and higher cost of risk," Damak said. Nonperforming loans from the real estate, construction and other sectors, coupled with the adoption of IFRS 9 accounting standards — which require lenders to take provisions for expected, rather than incurred, credit losses — will drive the cost of risk in the Qatari banking system upward, putting pressure on their net incomes.

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Qatari lenders could also see some pressure on margins as some of their low-cost deposits are replaced with high-cost funds and as they look to further diversify their funding needs, according to Citigroup analyst Rahul Bajaj, who also pointed to "evidence of deterioration" in bank asset quality in the third and fourth quarters of 2017.

Qatar National Bank (QPSC), for example, has tapped several international debt markets, particularly in Asia and Australia, in the months since the diplomatic feud began. Qatar Islamic Bank (QPSC) also raised funds from the two regions, while Commercial Bank (PSQC) has considered joining the bandwagon. Fitch Ratings said in October 2017 that Qatari banks are paying between 25 basis points and 30 basis points more than before the crisis to help win back investors.

Bajaj noted, however, that the Qatari banks and the economy have already absorbed the impact of the embargo, adding: "There could be some second-order impact from rising cost of funds or deteriorating asset quality, but we believe that even these issues should not create any major stress for the banking sector overall."

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.

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